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Financial Analysis: General Dynamic Land Systems
About the report
In this report, we will be putting the raw financial data of General Dynamic Land Systems(GDLS) to unearth the financial performance of the company over the period of past two years, i.e. 2013 and 2014. For this purpose, we will be using the tool of ratio analysis, where multiple ratio sections, i.e. Liquidity Ratios, Profitability Ratios, Solvency Ratios, Efficiency Ratios and Market Ratios will be used to determine the investment opportunity in the stock. In addition, all the ratio calculations will be made using the excel functions, however, any assumptions related to calculation of ratios will also be clearly specified at the very end of each ratio section.
About the company: General Dynamic Land Systems
Founded in March, 1982 as part of acquisition activity of General Dynamics where the company purchased Chrysler Defense for $338 million, General Dynamic Land Systems is the leading producer of armored vehicles while it serves customers like, US Army, Navy and National Coast Guard. The company is the only producer in the United States of Abrams MBT, the only battle tank used by the US military. Its manufacturing facilities sprawls worldwide over some places like Pennsylvania, Florida, Virginia and other places in Australia, Canada, France, Germany, Spain, and Switzerland.
Under this section, we will now move towards the main objective of this report, i.e. calculating ratios of the company. Each ratio section will be followed by a discussion as by how much and for what reason the numbers changed, and what are the likely implications of such changes.
Also known as Pure Balance Sheet Ratios, liquidity ratios provides information about the ability of the company to honor short-term obligations as and when they become due. Most of all, short-term creditors of the company, are interested in analyzing the liquidity ratios.
i)Current Ratio: Current Ratio/Current liabilities
ii)Acid Ratio: (Cash +Accounts Receivables)/Current Liabilities
Referring to the calculations above, one can witness that over the year, the working capital position of the company has gone weak. Beginning with the current ratio, the multiple fell from 1.47 to 1.27, amid 2.67% decline in the current asset base, while the current liabilities surged by 12.76%, thus putting a downsize pressure on the current ratio. Furthermore, we even tested the liquidity position using the stringent measure of acid ratio, finding similar trend yet again as the ratio multiple was found to plummeting from 0.80 to 0.61 amid deteriorating cash and receivables position that went down by 17.2% and 9.086%, respectively.
Thus, on the whole we can assert that General Dynamic Land System did faced poor liquidity position during 2014, and if the management do not improve the working capital position, it may face difficulty in honoring its short-term obligations.
As the name suggests, these ratios provides information to the stake holders about the profit margin the company is earning on its revenue figures, asset base, capital employed and many other aspects. Not only the stake holders, but even the management is interested to learn about its performance through these ratios. Below discussed are the three profitability ratios for General Dynamic Land System(GDLS), followed by an extensive analysis:
-Net Profit Margin: Net Profit/ Margin
-Return on Equity: Net Income/ Total Equity
-Return on Assets: Net Income/ Total Assets
Referring from the figures above, we can see that the year 2014 was a profitable period for the company, as it managed to source higher profit margins from revenue, asset base, and equity capital. As for net profit margin, the multiple increased from 7.55% to 8.21%, the increase here was guided by the upside trend in the net income figures which increased by 7.46% despite of fall in the revenue figures as the company was successful in controlling the operating cost that eventually fueled the net income figures. Furthermore, the ROE multiple may looks sceptic from the point of view of the layman shareholder of the company as the multiple surged from 16.25% to 21.41%, because of the decline in the shareholder equity by 18.42%. However, we may notice that the decline is caused because of increased treasury stock purchase by the management, which itself is a good and promising sign. Hence, here we will rate the ROE multiple as sustainable, and promising. The optimistic trend in the profitability ratio continues in the ROA ratio also as the multiple surged from 6.65% to 7.16%, that was sourced from 7.46% rise in the net income figures and a marginal fall in the asset base by mere 0.25%.
Overall, we may give a positive nod for the profitability position to the company, but the management needs to be aggressive and should attain a growth in its revenue figures, which combined with continued control on the operating expenses, can bring blockbuster profitability results for the company.
These set of ratios provide inside view of the capital structure of a company from an analytical point of view. Thus, by witnessing the trends in the solvency ratios, analyst can judge the level of financial risk embedded within the capital structure. Below discussed are the solvency ratios of General Dynamic Land System (GDLS), followed by an extensive analysis:
-Debt/Equity Ratio: Total Debt/ Total Equity
-Interest Coverage Ratio: Operating income/ Interest expenses
Referring to the figures above, we can see that over the year, the company increased their financial leverage as indicated by the trend in the debt-equity ratio that surged from 26.94% to 33.06%. However, the move seems justified with the corresponding increase in the interest coverage ratio that also increased from 35.77 to 37.77, indicating the enhanced capacity of the company to pay interest obligations associated with debt financing. Thus, we will here give a positive nod to the solvency position of the company, as the above trend indicates that the entity has a strong capacity to honor their long-term obligations.
However, once again, we would like to state that the interest coverage ratio increased because of improved operating income, which despite of lower revenue surged because of controlled operating costs. Therefore, we would like to see increased operating income sourced from increased revenue figures as well as controlled operating costs, as such instance will further solidify the solvency position of the company.
Popularly termed as, ‘’Asset Management Ratios’’, these ratios provide information over the efficiency of the management to utilize the asset base to generate revenue figures for the management. Below discussed are the efficiency ratios of the company, followed by an extensive analysis:
-Inventory Turnover Ratio: Cost of goods sold/Inventory
-Receivable Turnover Ratio: Revenue/ Accounts Receivables
-Total Asset Turnover Ratio: Revenue/ Total Assets
Referring to the efficiency ratios calculated above, we have seen some mixed results. Beginning with the inventory turnover period, the ratio multiple plummeted from 8.58 to 7.76. This indicates that year (2014), it took more time for the company to sell their inventory and capital remains tied up in the inventory levels for an increased period of time. This negative outcome is directly associated with the liquidity of the company, thus increased inventory turnover period can be attributed as one of the probable reason for declined strength in the liquidity position of the company, as discussed in one of the previous sections.
Next, as for total asset turnover, the multiple declined marginally from 0.88 to 0.87, indicating that the management was a little slow in employing effective strategies to generate increased revenue using the asset base. However, despite of this marginal decline in the asset turnover, we will still rate this efficiency ratio under negative nods as being a capital intensive entity, the asset turnover multiple should at least be equal to 1.0.
Finally, as for receivable turnover ratio, the multiple increased from 7.0-to 7.62, indicating that during the year, the customers paid their bills more quickly, providing a little relief to the company and also marginal assistance to the liquidity position.
Overall, we can assert that the management of General Dynamic Land System (GDLS) was inefficient over the use of company’s asset base, and it needs to work aggressively on days of inventory and total asset turnover to bring in alignment with the industrial average.
These ratios are used by the analysts to judge the investment opportunity hidden in the stock, i.e. if the stock is undervalued or overvalued, and gives an idea about the valuation of the stock. Below discussed are two popular investment ratios for General Dynamic Land System, followed by an extensive analysis:
-PE Ratio: Market Price/ EPS
-Dividend Yield: Dividend per Share/ Average Market Price
-Investment Ratio Analysis
Beginning with the most popular investment ratio, PE Ratio, we found that the multiple increased from 11.47 to 15.75. This indicates that the investors expected higher growth in the stock and was ready to pay $15.75 to claim mere $1 of the stock. In short, we can see that the investors are optimistic for the growth of the stock.
Next, we calculated the dividend yield for the stock, and found the multiple declined marginally from 21.8% to 2.08%. Important to note, this financial ratio shows how much a company pays out in dividend each year relative to its share price.Therefore, we can assert that during 2014, General Dynamic Land System could not offer better dividend payout to its shareholders relative to its market price.
On the whole, as for investment ratios, we have mixed conclusions as although investors are optimistic for the company’s growth as indicated by the PE ratio, but the entity fails to woo the investors as it fails to increase its dividend yield. This might be a great set-back for the investors who require a minimum stream of cash flow from their investment portfolio and willing to secure this cash flow by investing in stocks paying relatively high, stable dividend yields.
-Retention Ratio: (1-Dividend per share/ Earning per share)
2013: (1- 1.68/6.67) = 74.81%
2014: (1-2.42/7.42)= 67.38%
-Payout Ratio: 1-Retention Rate
2013: 1-0.7481= 25.19%
2014: 1-0.6738= 32.62%
Referring to the above calculations, we can assert that General Dynamic Land System has more of a reinvestment culture with high retention rate. However, during 2014, owing to marginal financial performance, it increased the payout to the investors from 25.19% to 32.62%.
At the end of this paper, we can conclude that General Dynamic Land System is good-on -fundamentals Company that has shown strong profitability margins. Even though it failed to witness surge in the revenue figures, it managed to increase the profit figures by controlling its cost figures. In addition, management has increased the financial leverage, but increase in the interest coverage leaves us with no worries. On the other hand, we did witnessed weak cash and liquidity position along with increased days of inventory and low asset turnover. However, considering the buy-back strategy (treasury stock repurchase) of the company is a clear indication that management has a belief in the company’s working, and the same is reflected in the increased PE ratio multiple.
Therefore, at the end, I conclude that we should buy company’s stock as it is readily creating value for its shareholders. Our recommendation is also in align with 18 other market analyst that are following the stock. Here is the analyst opinion over the stock since past three months:
About GENERAL DYNAMICS LAND SYSTEMS INC. n.d. http://www.vault.com/company-profiles/auto/general-dynamics-land-systems-inc/company-overview.aspx. 21 April 2015.
Analyst Opinion-GENERAL DYNAMICS LAND SYSTEMS INC. n.d. http://finance.yahoo.com/q/ao?s=GD+Analyst+Opinion. 21 April 2015.
Dividend Yield. n.d. http://www.investopedia.com/terms/d/dividendyield.asp. 21 April 2015.
GENERAL DYNAMICS LAND SYSTEMS INC. "Annual Report 2014." Annual Filing. 2014. Print.
loth, Richard. Investment Valuation Ratios: Introduction. n.d. http://www.investopedia.com/university/ratios/investment-valuation/. 21 April 2015.
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